EUR/GBP Signals Bearish Continuation after Diverging UK and EU Data

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EUR/GBP Signals Bearish Continuation after Diverging UK and EU Data

June CPI
Today, we got inflation data from the UK for June. According to the Office of National Statistics (ONS), consumer inflation rose at an annualized rate of of 1.9%. Forecasts were around 1.6% and May’s reading was 1.5%. The hot CPI data was led by clothing, food, and air transport.

BoE:
Mark Carney and the Bank of England have guided markets to look for a rate hike at the end of 2014 to early 2015. The unexpectedly hot inflation rate, if sustained, can give the BoE more room to hike rates in 2014 instead of waiting. Traders have already been buying GBP like hotcake, as we will see in the EUR/GBP charts below.

ZEW Economic Sentiment:
The EUR on the other hand has been pressured. Economic data in Germany and the Eurozone have been soft, and credit conditions are giving markets a reminder of the regions credit crisis a few years ago. Today, German ZEW Economic Sentiment for July came in at 27.1, missing the 28.9 forecast, and the previous reading of 29.8. It is the lowest reading for this index since the December 2012. Meanwhile, the Eurozone’s ZEW Economic Sentiment came in at 48.1, drastically lower than the 62.3 forecast and the 58.4 reading for June.

The diverging data out of the UK and Eurozone paved the way for a sharp slide in the EUR/GBP. This move is mostly due to GBP strength and partially to EUR-weakness. As you can see in the 4H chart, the market faded the pair after a week of consolidation. Today’s reaction is already returning price back to the bottom of the consolidation at 0.7915, which is also the low on the year.

EUR/GBP 4H Chart (7/15):
eurgbp 7/15/2014(click to enlarge)

As price breaks below the 1-week consolidation, a bearish continuation is in play. The prevailing trend has been strong, and there is no reason to believe EUR/GBP should reverse now. If price fails to break below 0.7915 and pushes up above 0.7980, then we got some signs toward a bullish correction. Otherwise, the market remains bearish, and there is room to run until the 2012 low of 0.7765.

EUR/GBP Weekly Chart (7/15):
eurgbp 7/15 weekly chart
(click to enlarge)

While there is no reason to believe EUR/GBP will reverse, we will have reason to look for support around 0.7765, especially since the weekly RSI will likely be below 30, and show oversold conditions in the long-term. Then, a significant consolidation could be due, with price likely to gravitate toward the 0.80 handle.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.